TECHINASIA: Peer-to-peer lending is one of the hottest – if not the hottest – business model in China’s venture capital scene right now. P2P lending startups are getting funded left and right, with new names entering the game each week. The pace of these companies flooding the market has risen so dramatically that we’ve largely given up on covering all of them.

Peer-to-peer lending’s explosion in China is largely due to the inefficiencies and high barriers to entry at traditional banks, the biggest of which are state-owned. P2P lending allows a much larger segment of the population to easily obtain loans – and conversely, it lets laymen with disposable income invest their money into this high-interest market.

But among all the fresh-faced financiers looking to gain a slice of the pie, there’s bound to be a few bad eggs. Yesterday, an official from China’s Inter-Ministerial Joint Office reported the number of incidents involving illegal fundraising rose 11 times in 2014, and is on track to rise 16 times the 2013 figure in 2015, according to QQ Tech. In 2014, 8,700 cases were filed, and 2,200 were filed this year in January and February alone, according to the Ministry of Public Security.

No credit rating system

While P2P lending fraud has grown the fastest, traditional private lending is still a major source of scams. The high rate of fraud results from a number of factors, including a lack of regulation in this relatively new sector. China’s central bank is now drafting new laws to reign in illegal fundraising. Many of the scams in the market today promise lenders high returns on “investment projects” and “financial products” that target the elderly.

Vetting borrowers is also a challenge for P2P lenders. Unlike countries like the US, China lacks a public credit rating system, so the companies typically have to do their own due diligence or outsource it to someone else. Just how diligent these companies are about their due diligence varies widely. Some of the bigger and more reputable P2P lending sites include Wangdaizhijia, PPDai, Dianrong, Edai, and Renrendai.

Last year, China’s top search engine Baidu clamped down on these shady practices, removing links to over 800 P2P lending websites from its search results. The blacklist came after a string of fraudulent sites went dark and high-tailed it with lenders’ money.

In 2013, the Beijing government encouraged these sorts of financial startups to set up shop in Zhongguancun, a district often referred to as “China’s Silicon Valley.” The government carved out three plots of property for these companies to establish their offices, promising cash rewards, tax breaks, lower rent, and streamlined procedures for registering businesses.